Final Word: The Economic Impact of the Supreme Court Decision in Merck v. Integra

On June 13, 2005, in Merck KgaA v. Integra Lifesciences I, Ltd., the US Supreme Court ruled unanimously that the exemption to patent infringement outlined in Title 35, Section 271(e)(1) of the US Code extends to all uses of patented inventions reasonably related to the development and submission of any information under the Food, Drug, and Cosmetic Act, including preclinical studies. In practice, this means that the exemption will allow companies to use other firms' patented compounds for experimentation on drugs that are not ultimately the subject of a submission to the Food and Drug Administration.

Beverly W. Lubit, PhD

Although the decision has been reported widely, its economic repercussions — namely that it will cause great economic harm to small companies that develop research tools and could also increase the cost of drug development — largely have gone unnoticed.

Because investment in research tool companies will become more risky and the cost of capital for these companies consequently will go up, the price for licensing the technology that these companies develop will increase. In a worst-case scenario, if small research tool companies disappeared, the economic risk of new drug development would be concentrated in large pharmaceutical companies, whose allocation of the incremental cost of tool development is likely to increase the cost of new-drug development.

Small companies now find themselves in financial limbo. Uncertainty engendered by the risk that large pharmaceutical companies may legally infringe a patent may make investors less willing to invest in small businesses whose only assets are their intellectual property (IP). Worst off are small businesses whose primary assets are research tool patents for technologies that help uncover and test new therapies and to take incremental steps toward new drug modalities. Without these small research tool companies, large pharmaceutical companies would have to look elsewhere to do this early development work, fund this work internally, or forego otherwise promising avenues of research.

This decision also may lead to a push to reduce royalties, or for companies to declare the expiration of license agreements based on patents. As a result, a research tool company's expected revenue stream may not materialize, because a license for its technology may no longer be necessary to its potential licensing partner.

Research tool companies are caught in a no-win situation. If they do not apply for patent protection and instead decide to protect research tool assets as trade secrets, the need to maintain confidentiality will prevent the technology from being widely disseminated, leading such assets to be undervalued. If they apply for patent protection, and the patented invention is a research tool useful in drug development, the companies run the risk that others will use their inventions without paying royalties, which likely will lead investors to undervalue the companies' IP assets.

Only Congress can fix this situation, by amending 271(e)(1) to carve out research tools from the exemption.

Failing that, one solution may be for tool companies to ask, as part of their negotiations with large pharmaceutical companies, for a waiver of the rights provided under this decision. If large companies agree not to use proprietary technology and effectively contract away their infringement rights, they will benefit by gaining access to leading edge technology and better research tool development.

Such agreements would foster both the survival of small biotechnology tools companies and the evolution of healthy working partnerships between these companies and their large pharmaceutical company counterparts.

Beverly W. Lubit, PhD, is counsel for the Tech Group at Lowenstein Sandler, 65 Livingston Ave., Roseland, NJ 07068, 973.597.6170, blubit@lowenstein.com.